To effectively manage your business finances, it is crucial to establish a proper system. Balancing the books, which involves reconciling your business finance figures, is an essential method for ensuring that all financial transactions within your business are accurately recorded and accounted for.
This process enables you to maintain financial transparency and provides a clear overview of your company’s financial health. By diligently balancing the books, you can identify any discrepancies, track your income and expenses, and make informed financial decisions for the growth and success of your business.
Keeping a record
Maintaining accurate records is the foundation of effective bookkeeping and accounting practices. Balancing the books, which involves reconciling debits and credits, lies at the core of business accounting.
Most businesses follow the practice of balancing their figures at the end of each month using double-entry bookkeeping. This method records every transaction as both a debit and a credit, providing a systematic way to identify errors and safeguard the business against potential fraud from customers, clients, suppliers, or employees.
While managing your business accounts is crucial, you may consider hiring an accountant for this task. However, an alternative approach is to enroll in our comprehensive masterclass course on accounting and bookkeeping. Not only is it a more cost-effective option, but it also empowers you to become a proficient financor upon completion.
Traditionally, business transactions were recorded by manually writing them down in a ledger book and performing manual calculations. Nowadays, there are convenient alternatives such as using spreadsheets or user-friendly accounting software, which are readily available.
By utilizing accounting software, you can easily track and organize your transactions. This enables you to store, record, sort, and retrieve information for each transaction, facilitating the generation of essential documents like sales invoices and financial reports. Additionally, the software can help identify any imbalances in your records and calculate totals accurately.
It is important to keep your accounting software up-to-date to ensure compliance with current tax regulations and requirements. Regularly updating the application helps you stay in line with the latest rules and ensures the accuracy and reliability of your financial records.
Producing financial reports
A well-established bookkeeping system enables you to generate financial reports that are essential for optimizing and monitoring the financial health of your business. The following key financial reports are crucial for all businesses:
Digital accounting tools
1. Profit and loss statement
Also known as an income statement, this report allows you to evaluate the profitability of your business over a specific period. By comparing revenues (cash inflows) with expenses (cash outflows), you can assess the financial performance of your business.
2. Statement of cash flow
This report illustrates how money is flowing in and out of your business, providing insights into your ability to pay bills and manage cash effectively.
3. Balance sheet
A balance sheet provides an overview of your business’s financial position. If your bookkeeping is accurate, the total value of assets on your balance sheet should be equal to the sum of your liabilities and equity. A healthy balance sheet with low liabilities and high equity puts your business in a favorable position to expand or navigate economic downturns.
Understanding double-entry bookkeeping
Double-entry bookkeeping involves recording every transaction twice, reflecting its impact on different accounts.
In a double-entry spreadsheet or ledger, each transaction has a debit column and a credit column. This demonstrates how one form of asset, such as cash, is exchanged for another form of asset, such as inventory, equipment, or raw materials. Essentially, every cash outflow from your business is replaced by the acquisition of an asset or service.
For example, if you purchase $200 worth of stock on credit, you would record a debit of $200 in the inventory (assets account) column and a credit of $200 in the accounts payable (liabilities account) column.
This process is repeated for every purchase made throughout your business’s fiscal year, ensuring all transactions are accurately recorded.
| Debit | Credit | |
| Inventory (Assets account) | $200 | |
| Accounts payable (liabilities account) | – | $200 |
| Total | $200 | $200 |
Debits
Debits represent all the money flowing into your business. In the given example, the debit entry reflects the value of the additional stock you have purchased, even though it has not been sold yet.
Credits
Credits represent all the money flowing out of your business. Since you have not made the payment for the stock yet, it is recorded as a credit because it will need to be paid in the future.
Balanced total
The total amounts in both the credit and debit columns should match or “balance.” Balanced totals indicate accurate recording and ensure the integrity of your financial records. If the totals do not match, you should review both columns to identify any potential errors.
Need to knows...
…and resources owned by the business, including equipment and stock. It also includes accounts receivable, which are sales that have been made for which money is outstanding.
…debts, such as bank loans and accounts payable – money owed by the business.
…after the total value of your business’s liabilities is deducted from the total value of your assets. (Equity = assets – liabilities)
…– the money you receive from sales of goods or services, or from investments and dividends.
…you pay out for goods, materials, services, salaries, rent, utilities etc.
